Insurance agent alleges Hanover ploy

A Massachusetts insurance agent yesterday charged that Hanover Insurance of Worcester offered to pay him $6.6 million over three years to either sell out to a rival or shut down so the insurer could shed 15,000 policyholders with about $15 million in annual losses.

John Rapo of Rapo & Jepsen Insurance Services of Boston said he has filed suit against Hanover, the lone insurance company servicing his customers, seeking $44 million in damages for reneging on the deal. Hanover denied the charges.

As outlined by Rapo, the deal was similar to one that Hanover blew the whistle on in late 2001, when it accused Arbella Mutual Insurance Co. of dumping money-losing customers on Hanover by funneling more than $1 million to Rapo & Jepsen to buy up six Arbella agents with combined annual losses of $3 million.

Hanover, which has a $20 million suit pending against Arbella and Rapo & Jepsen in connection with that earlier alleged deal, said through its attorney that the company was negotiating with Rapo to reduce the losses of his customers when Rapo came up with the idea of selling his company to an agent of Commerce Insurance of Webster.

The proposed sale would have effectively transferred the losses associated with Rapo's agency from Hanover to Commerce and in the process netted Rapo a total of $11 million -- the $6.6 million fee from Hanover and a $4.4 million purchase price from the unnamed Commerce agent, according to Rapo's lawsuit.

Owen Gallagher, an attorney representing Hanover, said the deal would have been financially attractive to Hanover. But he said the insurer pulled the plug on the negotiations when it became clear that Rapo was trying to do to another insurance carrier what Arbella and Rapo had done to Hanover.

"Ultimately, it's do unto others as you would have them do unto you," Gallagher said.

The allegations by Rapo add another bizarre twist to the state's strange system of assigning high-risk drivers to insurers. That system is being revamped, in part because of earlier reports about insurance carriers playing hot potato with agents representing customers with millions of dollars in losses.

Most auto insurers voluntarily enter into contracts with agents to represent them, but there are many agents no company wants to do business with because their high-risk clients are likely to generate large losses. Those agents, called exclusive representative producers, are assigned by a quasipublic state agency to insurance companies based on their market share.

Because losses among those agents vary dramatically, insurers wheel and deal behind the scenes to try to attract agents with lower losses and dumping those with high losses.

After Hanover accused Arbella and Rapo & Jepsen in 2001 of engaging in a scheme to dump money-losing Arbella customers on Hanover, state officials issued new regulations barring insurers from paying money to ERPs of another carrier to induce them to switch insurers.

The Romney administration is pushing regulations that by 2008 would do away with the current system and assign high-risk drivers to carriers directly.

Rapo, in a telephone interview, said Hanover desperately wanted to reduce the losses coming from customers of his agency, which has offices in Boston, Lawrence, Brockton, Marlborough, and Framingham. Hanover officials say the company pays out $1.49 in claims for every $1 in premiums it collects from Rapo's customers.

Rapo said he and Hanover negotiated a "development and incentive offer" that would have guaranteed Rapo $6.6 million in commissions over three years if he could reduce the losses associated with his customers.

Rapo said it was clearly understood by Hanover that the only way he could achieve a significant loss reduction was by selling his business to another agent or shutting it down. He said he then negotiated a $4.4 million sales deal with a Commerce high-risk agent, whom he would not identify.

"Hanover knew about it 100 percent," Rapo said.

The deal broke down, Rapo said, not because of any ethical stand taken by Hanover but because he refused to cooperate in Hanover's lawsuit against Arbella. He said Hanover has since harassed him and his customers in an effort to hurt his business. Hanover denied Rapo's allegations.

Rapo declined to comment when asked whether Arbella was paying his legal expenses.

Bruce Mohl can be reached at mohl@globe.com.